Can you name the types of stock the following business have?

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BUSINESS STUDIES YEAR 10 UNIT 1: THE PURCHASING FUNCTION

Stock Control

What is Stock (Inventory)?

Stock is classified as any material or finished products a company

currently holds.

Companies need to be very careful how much stock they hold. They

cannot hold too much, but they cannot hold too little.

Can you name the types of stock the following business have?

Business Types of Stock

Supermarket Food in cans, Toiletries, Ice-Creams, Milk

PC Manufacturer Transistors, Monitors, Keyboard parts, Power supply

Bike Shop Bikes, parts for repairing bikes

Local butchers Beef, Pork, Chicken, Rabbit

What is Stock Control?

Companies need to be very careful how much stock they hold. A system of stock

control therefore controls the firm’s investment in stock (inventory) to avoid

overstocking or understocking

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We are a shoe shop. Name the pictures below whether these are overstocking or understocking

Water for

employees

Shoes for sale

The Purchasing Department needs to ensure that not

too much capital (money) is tied up as stock (spent

on stock that will take a long time to sell or use).

This is called Overstocking

If too little stock is held, this may lead to costly

delays in manufacturing or delivering the goods to

customers. Carrying too little stock is called

Understocking

What do you think are the main objectives of a good stock control system? Think

in terms of overstocking and understocking.

A system of stock control ensures that the business does not hold too much or too

little of stock items. Its purpose is therefore:

1. To avoid disruptions in production or failure to meet customers’ demands

2. To avoid excessive stocks

Think about the following businesses. Consider what might be the effects of having too much stock or

too little stock?

Business Too much stock Too little stock

Supermarket Stock that is not sold and goes bad.

The business might be incurring

unnecessary additional storage costs.

Customers will find items to buy

elsewhere (losing customers)

PC

Manufacturer

Items become obsolete and not saleable

because not usable.

Delays in production of computers

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Too much stock Too little stock

Bike Shop Won’t have space for different types of

bikes and therefore cannot sell bike to

different age groups

Bike shop cannot operate efficiently

without delays in selling to customers.

Customers may decide to buy elsewhere

Local butchers Animals would have been killed

unnecessarily.

Legal repercussions on health and safety

The cost of frequent orders will be high.

Losing customers

Ordering Costs are costs incurred every

time an order is placed. These include

clerical costs (invoice processing,

accounting and communication),

cost of finding suppliers

transportation costs to the business

receiving costs (such as uploading goods

at a warehouse, and inspecting goods to

make sure they are the correct items and free of defects),

Holding Costs are costs incurred in storing inventory before it is sold.

These usually include:

Inventory financing costs, such as interest paid on overdraft used

to pay for the stock

Opportunity cost of investing the money elsewhere which would

have given a higher return

Storage space costs such as renting out the storage facility, its

lighting, heating, etc.

Inventory handling costs such as insurance

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Just-In-Time

Stock needs to be ordered in advance of when it is needed, but not

too far in advance.

Just –in-time (JIT) production uses stocks that are delivered to the

production line ‘just in time’ to be used.

With this approach, the business needs less factory space, as it holds

smaller stocks, but it depends on suppliers agreeing to meet delivery

requirements.

The business does not have so much money tied up in stock or

warehousing costs as it has minimal buffer stock (stock stored in case of

unforeseen stock shortages).

However, the reliability of the supplier in delivering good-quality stock

on time is crucial to keeping the production process running smoothly.

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Stock Control – Case Study

Philip owns a soft drink factory which makes ‘Slurm’. The drink itself is

made on site, using a mixture of fruit and other ingredients. The cans are not

made on site – they are bought from a local can supplier. The drink costs

Philip 20p to make and the can costs him 10p to buy – he sells the drink to

retailers for 50p.

Philip likes to make sure he has plenty of cans in stock because once, he ran

out and it was very costly to the business: The workers were unable to carry

on making the drinks, but Philip still had to pay them their wages for the day.

Also, he had to delay a delivery to a local supermarket and they were so

annoyed that they switched to another supplier.

Nowadays, Philip keeps at least 10,000 empty cans in stock at any one time.

The advantages of this are that he never runs out, plus he gets a discount for

buying in bulk (an order of 10,000 works out at 10p per can, but an order of

less than 10,000 works out to be 15p a can).

However, there are some disadvantages to this system;

Philip has had to rent out an extra storage room to keep the cans in at a cost of £500 per month.

He has also found that the cans sometimes get damaged as they are moved from the storage room to the

production line.

Philip had another problem recently; he had just paid for a delivery of 10,000 cans (£1,000) when he

received a final reminder for his telephone phone bill (£75) which would be cut off if he didn’t pay

immediately. Philip had no money left in the bank account to pay for the phone bill.

Finally, Philip recently found that some of the cans in the storage room had gone rusty and had to be

thrown away.

Questions:

1. What are the advantages of holding high levels of stock?

The advantages are:

Buying in bulk often reduces the cost.

Shipping in bulk is likely to cost less in the long run.

2. What are the disadvantages to Philip of holding high levels of stock?

Overstocking increase costs for businesses as holding stocks are an expense for firms for several reasons.

Increases warehouse space needed

Higher insurance costs needed

Higher security costs needed to prevent theft

Stocks may be damaged, become obsolete or perish (go out of date)

Money spent buying the stocks could have been better spent elsewhere.

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3. Philip has heard that there is a stock control system called ‘Just-in-time’. Find out what this means

and why it might be a good idea.

General Motors operates using JIT inventory, relying on its supply chain to deliver the parts it needs to

build cars. The parts needed to manufacture the cars do not arrive before or after they are needed;

rather, they arrive just as they are needed.

The Bailey Seat Company supplies GM with all the seats it needs for the production of its full-size

trucks. The Bailey Seat Company and GM work closely together so that the seats arrive at the assemble

plant as they are needed for each truck being built. The seats are never stored at GM's assemble plant

waiting to be installed into the trucks. The seats are delivered to the plant and are immediately installed

into the new trucks.

Just In Time production uses stocks that are delivered to the production line “just in time” to be used.

With this system

The space once used for storage is saved.

There is not a lot of money tied up in stock

There are no delays in delivery.

4. Philip has also heard the business term ‘Lean Production’. Find out what this means.

Lean production is a Japanese approach to management that focuses on cutting out waste, whilst ensuring

quality. This approach can be applied to all aspects of a business – from design, through production to

distribution.

Lean production aims to cut costs by making the business more efficient and responsive to market needs.

This approach sets out to cut out all activities that do not add value to the production process, such as

holding of stock, repairing faulty product and unnecessary movement of people and product around the

plant.

5. How much profit per can does Philip currently make?

Philip is making a profit of 10c (20c – 10c)

6. What might happen to the profit per can if Philip stops buying in bulk?

Philip would face a decrease in profits.

7. Why it is better for Philip to sell his cans to retailers, rather than directly to customers himself?

Selling the product to the retailer :

Might reach more consumers

Retailers hold stock of your products at their sites, reducing your own stock-holding and distribution

costs.

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First In First Out (FIFO)

In order to prevent stock being wasted

firms may have a FIFO system of stock

control. This stands for First In First

Out.

Under this system the goods which are

received first and have been in stock longest are the first to be sent to

customers. The firm will use a stock control card or stock record card to

record the number of goods issued and received.

The Stock Control Card

Stock Record Card

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Levels of Stock

Maximum Stock Level:

Is the maximum quantity of stock item a business is allowed to have at any point in time. This would

ensure that no capital is held in stock unnecessarily.

Re-Order Level:

Shows at what point an order should be placed with a supplier to avoid the danger of running out of

stock. Nowadays, through the use of computers and inventory software, this is shown automatically

through pop ups.

Minimum Stock Level:

Shows the lowest amount of stock that should be kept. A lower amount than the minimum stock level

may lead to delays in delivery or production.

Re-Order Quantity:

Is the quantity ordered when the Re-Order Level is Reached.

Lead Time:

Is the time (hours, days, weeks, etc.) required for the suppliers to deliver the items ordered.

Checking of Stock

Theft, damage or inaccurate records would result in actual stock levels differing from the quantities recorded

in the stock cards. These can cause a firm to lose a lot of money. For these reasons a check called an

inventory or stock-check is made.

Items in stock are counted to see that the number of items actually counted agree with the figures shown in the

stock record cards.

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Nowadays, the use of barcodes or QR Codes facilitate the counting of stocks.

Firms may use

a periodic stock-check or inventory-check are checks

performed at specific intervals, e.g., every month, six

months or year. This is usually carried out during

shut-down period, thus avoiding disruptions to

operations.

a permanent inventory or stock-check system. Using

this system, the firm would employ full time stock-

checkers whose job is to check the stock levels

against stock cards all year-round.

Why do actual stock counting differ from Stock Records?

1. Items taken out are not recorded at all or the amount is wrongly inputted

2. Items received are not recorded at all or the amount is wrongly inputted

3. Faulty items returned are not deducted

4. Items are stolen and no adjustments have been made

5. Items expire or deteriorate and no adjustment is made

6. Employees may be entitled to buy from the company at a reduced price and this is not recorded

LORRAINE ATTARD 10


Short Question:

1. Describe the functions of the stock controller:

The stock controller’s job is to decide

The minimum level of stock

The maximum level of stock

The re-order level for stock

The quantities to be ordered.

2. What is overstocking and what are its implications?

Overstocking is when too much capital is tied up as stock and therefore, the business holds

more stock than it needs.

Implications of overstocking should include?

Difficulty in storing the goods.

Their shelf life.

Insurance cover

The amount of money tied up in stock

Cash flow.

3. Why is understocking undesirable?

Understocking is undesirable because it can lead to delays in manufacturing or deliveries of

goods to customers.

4. JIT stands for Just-In-Time. What are its advantages and disadvantages?

The advantages of JIT are:

Improved Cash flow

Decrease in Capital tied up as stock

More space production

Less waste & damage

Links to supplier improved

More control of supplier

Opportunity for computerisation

Worker motivation

More flexible design of product

The disadvantages of JIT are:

Great reliance on suppliers

Order cost per unit may be high

Administrative burden & cost

Vulnerable to supply interruptions e.g. natural disasters, breakdowns etc.

Hard to cope with sharp rise in demand

May let customers down

Needs efficient management and control systems

LORRAINE ATTARD 11


5. What is FIFO and why is it used?

FIFO stands for First In First Out whereby stock that is held the longest in the firm is used first.

6. What is a stock record card used for?

The stock record card is used to control the levels of stocks.

7. Explain the term ‘re-order level’.

Re-order level is the level at which the firm will place an order for items to be delivered to it.

8. What does ‘max stock’ mean?

Maximum stock is the maximum level at which the business is allowed to have an item of stock.

Having more items than the maximum stock level will result in too much capital being tied up in

stocks.

9. What is a periodic stock check?

A periodic stock check is when the firm counts the number of stock items and checks them with

its stock cards at specific intervals, e.g. monthly or yearly.

Annual 2016 Year 10 Question 2

Question 2 – Read the following passage and then answer the questions that follow:

Jane is the chief store-keeper in a manufacturing company. Among her responsibilities she

has to issue materials to the workshops against a materials requisition and to send the

purchase requisition when the stock reaches the reorder level. For some time, she, together

with her team, has been thinking of changing into a system of Just-In-Time (JIT).

(a) Explain the following terms as used in stock control:

(i) Re-order level (1 mark)

(ii) Just-In-Time (1 mark)

(b) Explain terms maximum stock level and minimum stock level. (2 marks)

(c) Explain three other reasons, besides those mentioned in (b) above, why firms should

exercise good stock control. (6 marks)

(d) Mention two ways how Jane can keep record of the stocks in the store. (2 marks)

(e) Explain two advantages of each method of stock control mentioned in (d) above. (8

marks)

LORRAINE ATTARD 12


Annual 2017 – Year 10 No. 24

24. (a) Explain what you understand by the following terms:

(i) understocking (2 marks)

(ii) overstocking (2 marks)

(iii) maximum stock level (2 marks)

(iv) Minimum stock level (2 marks)

(v) Re-order level (2 marks)

(b) Explain why a business organisation should operate strict stock control. In your answer,

refer to the problems that a firm would face in the case of

(i) overstocking and (ii) understocking (10 marks)

Total for Question 24: 20 marks

Matsec 2010 Paper 1 Question 8 (a-c)

a) Why is stock control important in a business? ( 2m)

b) Distinguish between the minimum stock level and the re-order stock level (2m)

c) Distinguish between the internal recruitment and external recruitment (2m)

Matsec 2013 Paper 1 Question 4 (a-d)

a) What is the purpose of stock control? (2m)

b) What does the minimum stock level represent? (2m)

c) Why should a firm establish a maximum stock level? (2m)

Matsec 2018 Paper 2A Question 5 (a-b)

a) Define “re-order stock level”, “minimum stock level” and “maximum stock level”

(4m)

b) List FOUR criteria for selecting suppliers. (4m)

Can you name the types of stock the following business have?

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